Ferguson cuts guidance as market growth slows
Ferguson reported a strong first half but the plumbing specialist cut its full-year guidance as growth has "moderated" in its markets.
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Revenue from the ongoing business of $10.7bn in the half year to 31 January was up 8.1% over the same period a year ago, or 8.9% on a constant currency basis and 6.5% on an organic basis.
Like-for-like organic growth in the second quarter slowed to 6.3% from 7.5% in the first. The US grew strongly at 9.7% in the second quarter versus 9.6% in the first, but UK and Canada were softer than expected, with residential and industrial end markets weaker.
Trading profit from ongoing business grew 7.7% to $744m, or 8% at constant currencies, with gross margin edging up one basis point to 29.6% even though US margins fell 40 basis points in the second quarter amid rising labour distribution costs. Earnings per share increased 19.7% to 241.9 cents, boosted by last year's share buyback.
"After a strong revenue performance in the first half our growth rate has moderated recently in line with conditions in our markets," said chief executive John Martin.
He trimmed his estimates of group organic revenue growth to between 3-5%, meaning trading profit for the full year will be towards the lower end of the range of analysts' expectations, which were for around $1.59-1.63bn.
UBS analysts said the US is "now clearly slowing down" and they think management's comments imply the US slows to below 5%, with squeezed margins to follow.
Ferguson, which said it was planning to move its tax domicile from Switzerland to the UK after "recently announced Swiss tax reform which will reduce the benefits of continuing to be tax resident there" but that its 25-26% tax guidance remained unchanged, lifted the interim dividend 10% to 63.1 cents.
Net debt rose to $1.9bn from $1.4bn over the six months as seasonal working capital outflow increased to $503m compared to $398m, while cash generated from operations of $287m in the half-year was down from $390m a year ago. Net debt rose to 1.1 times EBITDA from a ratio of 0.8% a year ago.
Ferguson shares fell more than 9% to below 4,700p in early trade on Tuesday, lows not breached since late 2016.
A "decent" set of first half results is "likely to be overshadowed by the outlook comments pointing to a slowdown in recent trading" said broker Canaccord, noting that the consensus forecast for 2019 organic revenue growth appeared to be for around 5%.
The change in guidance implies a circa 2-3% cut to consensus trading profit for the full year.
"Valuation looks un-stretched but in the context of US macro and recession worries, the outlook comments are likely to spook the market in the near term," Canaccord's Aynsley Lammin said. "The recent inversion of the US yield curve will continue to worry the macro bears, and while these worries are understandable, recent trends are not conclusive as to whether we are seeing a slowdown or a trend moving into a US recession. Shares look good value assuming a US recession is avoided, but they are likely to be weaker today on near term worries and weaker outlook comments."
While the US remained robust in the half, said UBS, it is now "clearly" slowing down and was likely to squeeze profit margins.
"We think this is not that surprising given the weaker trends in housing over the last few quarters, but we believe the sharpness of the moderation in growth will surprise some," UBS added. "With weaker top line growth, operating leverage is guided not to make the previous double-digit flow through in H219 but rather 6-7%. This implies margins will compress."
Analysts at RBC Capital Markets noted that ongoing sales were ahead of the $10.53bn consensus estimate but trading profit was shy of the forecast $756m.
While the valuation seemed undemanding to the analysts, with shares trading at 12.5 full year forecast earnings and a dividend yield of 3.3%, "the slowing growth and a weaker US margin print will likely be the focus today".
"We continue to believe that Ferguson's end markets remain robust, and we like the strength of its market position and believe that the scale advantages (around procurement and supply chain and the customer proposition) should allow the business to continue to take further market share. Management is allocating capital to the higher-growth areas, where it has a competitive advantage, and the focus on cashflow and returns, along with a strong balance sheet, means that investors should continue to get an attractive mix of growth and shareholder returns. However, growth is slowing and cost pressures are an issue, and whilst valuation is undemanding, we believe short-term catalysts are lacking."